Financial Reporting and Regulatory Update

From the SEC

Public statements and announcements

Disclosures on complex or uncertain risks

On March 15, 2019, in London, SEC Director of the Division of Corporation Finance (Corp Fin) William Hinman addressed the 18th Annual Institute on Securities Regulation in Europe. He discussed how the largely principles-based U.S. securities disclosure requirements apply in areas where disclosure topics may be complex, related to uncertain risks, and quickly changing, such as those related to Brexit. He reminded the audience that U.S. “disclosure requirements are intended to provide investors with material information they need about companies and their securities offerings to make informed investment and voting decisions.”

Related to Brexit disclosures, Hinman discussed the wide variety of disclosures that Corp Fin has seen in all industries and across the same industries. He said that while some companies have disclosed only that Brexit is a risk that could materially affect the entity and its operations, other companies have included much more robust and thoughtful disclosures. The more simple disclosure is not sufficient to provide investors with meaningful information that will address the risk and impact.

In his speech, Hinman identified questions companies may consider when drafting and evaluating their Brexit disclosures, including:

“Is the business exposed to new regulatory risk given the uncertainty of which set of laws and regulations will apply and whether transition agreements will be in place?”

“Are there significant supply chain risks due to the potential disruption to the U.K.’s access to free trade agreements with other nations and any resulting changes in tariffs on exports and imports?”

“Does the company face a material risk of losing customers, a decrease in sales or revenues or an increase in costs due to tariffs or other factors?”

“Does the company have exposure to currency devaluation, foreign currency exchange rate risk or other market risk?”

“What is the company’s exposure to contractual risk in the face of Brexit?”

Additionally, Hinman discussed sustainability disclosures, as another example supporting the importance of flexible, principle-based disclosure requirements. He said, “the market is still evaluating what, if any, additional disclosure on these topics would provide consistently material and useful information. The marketplace evolution of sustainability disclosures is ongoing – companies certainly provide more sustainability information than they did ten years ago – and allowing this evolution to continue should provide market participants with a continued opportunity to sort out the types of information they find useful.”

Office of the Advocate for Small Business Capital Formation

On March 20, 2019, Martha Miller, the SEC’s new advocate for small business capital formation, spoke at the 1 Million Cups of Coffee event in Kansas City, Missouri, to introduce the Office of the Advocate for Small Business Capital Formation, including why it was formed, what its purpose is, and how it will approach its mission. Miller said that small businesses – which include companies from emerging, privately held, and publicly traded companies with public market capitalization of less than $250 million – are “job creators, generators of economic opportunity, and fundamental to the growth of the country”; however, she added, “absence of access to funding, small businesses cannot create new jobs, foster innovation, and develop into the next generation of publicly traded companies whose growth fuels Main Street investors’ retirement accounts.”

The SEC established this new office to provide a voice to small businesses at the SEC and in the regulatory arena, to advocate for the small businesses and their investors in Washington, D.C., and to assist in accessing capital. According to Miller, this mission will be accomplished by:

“Working with small businesses to understand their capital formation issues through education and outreach;

“Helping small businesses resolve issues with the SEC and self-regulatory organizations, including by recommending policy changes; and

“Analyzing the potential impact of proposed rules and regulations likely to significantly affect small businesses.”

Forum on distributed ledger technology and digital assets

On March 15, 2019, the SEC announced that it will host a live public forum focusing on distributed ledger technology (DLT) and digital assets. The forum, which will be webcast on May 31, 2019, is being organized by the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub). The forum is intended to create better communication and understanding of DLT and digital assets issues. Topics to be addressed include initial coin offerings, digital asset platforms, DLT innovations, and impacts of such technologies on investors and the markets.

Staffing updates

On Feb. 28, 2019, the SEC announced that Gabriel Benincasa has been named the SEC’s first chief risk officer, a position created by SEC Chairman Jay Clayton. As chief risk officer, Benincasa will coordinate the SEC’s efforts to identify, monitor, and mitigate key risks facing the SEC.

On Feb. 4, 2019, the SEC announced that Elizabeth McFadden has been named deputy general counsel for general law and management. McFadden spent more than 15 years at the U.S. Department of Education, where she was deputy general counsel since 2011.

On Jan. 29, 2019, the SEC announced that Manisha Kimmel has been named to the new role of senior policy adviser for regulatory reporting to Chairman Clayton. Responsibilities of this role include coordinating the SEC’s oversight of the self-regulatory organizations’ creation and implementation of the Consolidated Audit Trail (CAT), as well as working with SEC offices and divisions on other regulatory reporting.

Rules and guidance

Disclosure modernization and simplifications

On March 20, 2019, the SEC approved a final rule, “FAST Act Modernization and Simplification of Regulation S-K,” to simplify and modernize disclosure requirements for public companies, investment advisers, and investment companies. The new rule, which stems from the SEC’s mandate under the Fixing America’s Surface Transportation Act (FAST Act), is intended to improve the readability and navigability of disclosures in SEC filings and to discourage repetition and disclosure of immaterial information.

Except as noted below, the rule is effective 30 days after publication in the Federal Register. Highlights include the following:

Disclosure simplification

The final rule includes amendments that reduce administrative and disclosure burden by allowing registrants to:

Exclude, in most cases, the earliest of three years in Management’s Discussion and Analysis (MD&A), if the discussion has appeared in a prior filing

Provide disclosure about a physical property only to the extent that it is material to the registrant

Omit from exhibits:

Confidential information in material contracts and certain other exhibits without submitting a confidential treatment request to the SEC, if the information a) is not material and b) would likely cause competitive harm to the registrant if publicly disclosed (effective immediately upon publication in the Federal Register)

Attachments to material agreements if such attachments do not contain material information or were not otherwise disclosed

Any document or part thereof that is incorporated by reference in a filing (Instead, the registrant will be required to provide hyperlinks to documents incorporated by reference.)

Material contracts entered into within two years of the applicable registration statement or report, if the registrant is not a newly reporting company

Disclosure modernization

New required revisions to filings include:

Disclosing on the form cover page the national exchange or principal U.S. market for the registrant’s securities, the trading symbol, and the title of each class of securities

The final rule also includes parallel changes to several rules and forms applicable to investment companies and investment advisers, including amendments that require certain investment company filings to include a hyperlink to each exhibit listed in the exhibit index of the filings.

Proposal to expand “test-the-waters” provision

The SEC, on Feb. 19, 2019, proposed a new rule that would expand the “test-the-waters” reform by allowing all issuers to gauge market interest in registered securities offerings by permitting discussions on potential offerings with certain institutional investors prior to filing a registration statement. The test-the-waters communications are currently allowed only for emerging growth companies (EGCs), as provided for under the Jumpstart Our Business Startups Act (JOBS Act).

Under this new proposed rule, all prospective issuers, not just EGCs, would be permitted to assess market interest in a possible initial public offering or other proposed registered securities offering by allowing discussions with potential qualified investors before the filing of a registration statement. The proposed expansion of the “test-the-waters” reform is designed to provide companies more flexibility in determining whether to proceed with a registered offering before incurring the costs of preparing a registration statement.

Comments are due April 29, 2019.

Extended comment period for variable annuity and variable life insurance contracts proposal

The SEC announced on Feb. 14, 2019, the extension of the comment period on the proposed rulemaking regarding updated disclosure requirements and summary prospectus for variable annuity and variable life insurance contracts, which was published in the Federal Register on Nov. 30, 2019. The extended comment period ended on March 15, 2019.

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